G20 needs fresh approach

The Group of 20, once proclaimed the world’s premier economic forum, is now being dismissed as a glorified talk shop. Australia is chairing next year’s Group of 20 summit in Brisbane, and Mike Callaghan, the former Treasury official who heads the Lowy Institute’s G20 Studies Centre, agrees the organisation is in danger of losing its way.

Australia, he says, must show the leadership needed to reinvigorate and refocus the organisation. But what, apart from fine words and fireworks, can Australia really hope to contribute?

Callaghan argues that the G20 needs to overhaul its processes and refocus its agenda. He agrees that lack of action has undermined the G20’s credibility.

“A prime example of this has been the way that the repeated, but unrealised, commitments made to complete the Doha Development Round have damaged the G20’s standing," he says.

The G20 leaders promised repeatedly from 2008 onwards to take action that would lead to a successful outcome at Doha. Only after the 2011 summit did they finally acknowledge that the Doha round was getting nowhere and that a fresh approach was needed.

But even more damaging, Callaghan says, was the backsliding by G20 members from their own ringing declarations. He cites the Washington summit’s agreed standstill on trade and investment protectionist measures.

“Despite this agreement, a number of G20 members still imposed national trade restrictions that undermined the credibility of the forum, even if these restrictions did not have a significant impact on global trade," he says.

Australia has been one of the sinners. Nevertheless, trade reform is one area where we can make a significant contribution because we are regarded globally as an innovator.

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Australia’s key innovation is the Productivity Commission which, with its predecessor organisations, has been at the centre of a program of highly successful unilateral trade reform.

The commission’s work is based on three simple truths. First, as every economist knows, most of the benefits of trade reform go to the country that removes its trade barriers. Second, it is domestic political pressure that creates trade barriers, and only domestic political pressure will remove them.

And, finally, only independent public analysis of the economy-wide costs of protection is likely to counter the influence of the politically connected beneficiaries of protection.

Callaghan’s colleague at the Lowy Institute, Mark Thirlwell, reached exactly that conclusion several years ago. “Protectionism results from decisions taken by governments at home, for domestic reasons," Thirlwell and his co-authors wrote in 2009. “Any response to protectionism must therefore begin at home, and bring into public view the domestic consequences of those decisions. G20 leaders should sponsor domestic transparency arrangements in individual countries, to provide public advice about the economy-wide costs of domestic protection."

The Australian experiment shows that domestic political pressure to cut protection is more effective in the long run than the external “peer pressure" that Callaghan is pinning his hopes on. The backsliding by the G20 leaders is evidence of that.

The transparency arrangements to which Thirlwell referred are based on the Productivity Commission model. The commission provides the government public advice based on its own independent analysis. Crucially, the commission’s focus is economy-wide: protection is always good for the industry that receives it; the costs are borne by the whole economy. The government can, and often does, act against the commission’s advice, but the public exposure of the wider cost of trade barriers gradually creates the political environment in which reform is possible.

Very few countries make trade decisions in this open way. When President
Barack Obama
protected US tyre makers against Chinese imports, he sought the advice of his International Trade Commission (ITC).

But the ITC’s advice covered only the narrow merits of the case for protection: the extent of the “material injury" to US producers, and the trade barriers needed to stop it. It said nothing about the national economic interest. The public was aware of nothing but the ITC-endorsed case for protection.

Had the ITC had been asked also to advise on the national economic interest, there is no doubt that it would have recommended against protection.

Obama might have rejected that advice. But at least the American public would have been the wiser, and a step would have been taken to build the public support needed for trade reform, including the revival of the multilateral negotiations left moribund at Doha.